Computer sector alive and kicking

Despite facing a strong U.S. dollar, a delay in the shipment of Windows 98, and a weak Japanese economy, the personal computer sector is alive and kicking.

October 13, 19971:10 PM PDT

Despite facing a strong U.S. dollar, a delay in the shipment of Windows 98, and a weak Japanese economy--not to mention the purchasing delays and shifts in technology budgets that have resulted from the Millennium Bug--the personal computer sector is alive and kicking.

Growth and profits are imminent, at least for the big players offering a broad
range of products and services.

Compaq is expected to report earnings of 68 cents a share, up from 50 cents
a year earlier; IBM is expected to report 1.36 a share, up from 1.23; HP is
expected to report 78 cents, up from 62 a year earlier; and Dell, which is seeing soaring notebook sales, is
expected to show the biggest jump in earnings, up to 65 cents per share, from 39 cents reported during the corresponding quarter last year.

Jeff Baker, an analyst with Principal Financial Securities, said one of
the main growth drivers for Dell and Compaq is in the server arena. The companies are gaining market at the expense of the Unix market. Intranets and NT
servers are driving the increase in demand.

Baker pointed out that a corporate upgrade cycle also is a factor in the growth. He noted that Windows NT 4.0 is now available, which provides an opportunity for
many companies that didn't upgrade to Windows 95 because it isn't a stable
operating system for networks.

Another area fueling sales at Compaq, Packard Bell, and HP is low-cost
computers. Market research firm Computer
Intelligence said earlier this month that sales of sub-$1,000 PCs accounted for
40 percent of all U.S retail computer sales in August.

Compaq accounted for about 60 percent of all sales in this segment, helping
the company to increase its share of the U.S. desktop market to 45 percent,
the report says. Packard Bell was second in retail sales with 20.4 percent,
and HP was third with 14.9 percent.

"[Low-priced systems] are getting people all excited, but the bad
news is you have to sell more to get the same profits," said
Lou Mazzucchelli, an analyst at Gerard Klauer Mattison. "It is changing the complexion of the market: It's changing the way businesses compete."

Mazzucchelli noted that the cheaper machines are causing problems for companies that sell higher-priced PCs. "The computer companies are having a hard
time convincing people that they need to spend more to get a slightly
better machine."

Gateway 2000(GTW), which just recently entered the corporate market, does not yet
have to contend with the problem of its less expensive products cannibalizing its high-end product line, Mazzucchelli said.

It does, however, have other issues to contend with.

The company said it would miss expectations in the third quarter, even though
unit shipments are expected to be up about 30 percent over last year. The company said acquisition charges, write-offs, the UPS strike, and lower average unit prices would adversely impact third-quarter results.

Gateway, as well as Apple(AAPL), will find quarterly results falling short compared with year-ago performance.

Analysts are expecting Gateway to post profits of 11 cents a share,
compared with profits of 39 cents per share for the same quarter last year.
Apple, meanwhile, is expected to post a loss of 14 cents a share, compared
with profits of 6 cents a share last year, according to First Call.

Apple, which has seen declining market share and is seeking a new chief
executive as it pins its corporate strategy on the educational and
publishing markets, will find its year-ago quarter hard to beat. Last year
the company got a boost when it did not have to dip into its reserves
to the extent it thought it would in order to cover severance costs for a round of layoffs.

Despite events with Gateway and Apple, however, Kevin Hause, an industry analyst with International Data Corporation, said growth for the worldwide personal computer industry as a whole will be just under 13 percent for 1997 through 2001.

But he noted that the industry is running at a slower pace than previously.

Some factors contributing to the slight slowdown: Hand-held devices are getting smaller and faster, and that is
going to put pressure on the portable PC market. Also, manufacturers can't
build a business selling just one product and expect to get a majority of
the market. And the wider the variety of products companies produce, the
more the costs of competition are increased.

"As a whole, we are slowing a bit," said Hause, noting that each year is
still growing in double digits after a run of phenomenal growth in the
20 percent range during 1994 and 1995. Some regions, however, such as
Asia/Pacific and Latin America, can still expect growth in the 20 percent range, he
said, noting that it is easy to show high growth rates in emerging regions.
"If you go from 2 percent growth to 4 percent growth, that is 100
percent," he said.